Business

The Development Of Corporate Governance In Toulouse 1372-1946

The Development Of Corporate Governance In Toulouse 1372-1946

David Le Bris

KEDGE Business School

William N. Goetzmann

Yale School of Management – International Center for Finance; National Bureau of Economic Research (NBER)

Sebastien Pouget

Toulouse School of Economics

June 25, 2015

Abstract:

We document a sequence of institutional innovations associated with the corporate form over the course of several centuries in Toulouse. Shareholding companies that began in the 11th century formally incorporated themselves into two large-scale, widely held firms by 1373. In the years that followed they experienced the economic challenges and conflicts we now recognize as inherent in the separation of ownership and control. Using new and existing archival research, we show how the Toulouse firms developed institutional solutions including tradable shares, limited liability, governing boards, cash payout policies, external audits, shareholder meetings and mechanisms for re-capitalization.

We examine these developments in the context of institutional economic theory and the received history of the corporation. The Toulouse companies preceded the birth of the Dutch and English East India companies by centuries. The Toulouse firms shed light on the necessary and sufficient conditions for the development of the corporate form. We show that the constellation of features associated with the corporation can appear in situations of relative economic certainty and in the context of Medieval legal code that did not require the granting of governmental approval or patent.

The Toulouse firms are a unique case in which the corporation appears as a nexus of private contracts.

The Development Of Corporate Governance In Toulouse 1372-1946 – Introduction

In this paper we document a sequence of institutional innovations associated with the corporate form over the course of several centuries in Toulouse. Shareholding companies that began in the 11th century formally incorporated themselves into two large-scale, widely held firms by 1373. In the years that followed they experienced the economic challenges and conflicts we now recognize as inherent in the separation of ownership and control. Using new and existing archival research, we show how the Toulouse firms developed institutional solutions including tradable shares, limited liability, governing boards, cash payout policies, external audits, shareholder meetings and mechanisms for re-capitalization.

We examine these developments in the context of institutional economic theory and the received history of the corporation. The Toulouse companies preceded the birth of the Dutch and English East India companies by centuries. Many of the elements of the corporate form initially attributed to the peculiarities of long-distance maritime trade appeared earlier in a quite different economic context. The Toulouse companies were grain-milling enterprises whose profits were relatively predictable, except in case of disasters such as floods or fires. But a common economic features of both the India and the Toulouse companies was the huge capital expenditures requested to set up a long-distance maritime expedition and to set up and rebuild the watermills and the river dam, respectively.

The Toulouse firms shed light on the necessary and sufficient conditions for the development of the corporate form. We show that the constellation of features associated with the corporation can appear in situations of relative economic certainty and in the context of Medieval legal code that did not require the granting of governmental approval or patent. The Toulouse firms are a unique case in which the corporation appears as as a nexus of private contracts.

Located in Toulouse, the Bazacle and Castel milling companies were created in 1372 and 1373, respectively, from the merger of several independent, jointly-owned mills. The Bazacle company was situated on an island near a traditional ford across the Garonne River, downstream from the city. It, or its predecessor firms, had milled grain there since the 11th century. The Bazacle company switched to hydro-electric power generation in 1888 and was nationalized into the French national electricity company, EDF in 1946. The Bazacle hydroelectric power plant is still operating today.

The Castel company was located upstream on an island in the Garonne near the original castle of Toulouse. Like the Bazacle company, it milled grain over several centuries before finally going bankrupt in 1910 after a fire destroyed its mills. The locations of both of these firms made them naturally suitable for milling operations and created the conditions for profitable and relatively stable business over approximately nine centuries.

The Development Of Corporate Governance In Toulouse 1372-1946

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